Europe drawn back to its first problem - Greece

BRUSSELS/ATHENS, Aug 27 (Reuters) - The euro zone debt crisis was born in Greece. Nearly three years and two bailouts on, Europe must decide whether to give the country yet more help or cut it loose.

For all its complexities, Greece's problems essentially come down to three simple questions: Can the country return to growth? How big are its debts? And will the first ever be enough to pay off the second?

Put like that, one might wonder why policymakers have found a solution so elusive. But as ever, the devil is in the detail, and in Greece's case the details are devilishly difficult.

That is why ongoing efforts by the European Commission, the European Central Bank and the International Monetary Fund -- together known as the 'troika' -- to work out Greece's long-term growth and debt reduction prospects are so critical.

Everyone from German Chancellor Angela Merkel to ECB President Mario Draghi and Greek Prime Minister Antonis Samaras -- who wants two more years to make the cuts demanded of him -- is nervously awaiting the outcome of the troika's report, which is expected in late September or early October.

If it concludes that Greece is moving in the right direction, with the potential for growth and long-term debt-reduction slowly improving, everyone will breath a sigh of relief, even if a multitude of obstacles remain.

If, as appears more likely given the noises emerging from EU officials, the troika finds Greece is not doing enough and has no realistic prospect of whittling away its debts in the coming decade, then a moment of truth may finally have dawned.

With plans afoot for the euro zone rescue funds and ECB to protect Spain and Italy by intervening to lower their borrowing costs, it would seem perverse to let Greece crash out of the currency area now, unleashing a wave of contagion that would take the crisis to new levels.

Instead, there is likely to be a scramble to find a way to give Greece more help which does not look like it is landing the bill with the German taxpayer, something the Bundestag would be likely to reject.

Samaras hinted at that equation after talks with Merkel last week. "We're not asking for more money. We're asking for breaths of air in this dive we are taking," he said.

In turn, Merkel underlined just how important the troika's findings will be.

"What Greece can expect from Germany is that we will not make premature judgments but will await reliable evidence, which for me means the troika report," she said.

MOUNTAIN TO CLIMB

While it is impossible to predict what the troika (dubbed by Greeks the Men in Black) will come up with when they return to Athens on Sept. 5 for a second, more in-depth visit, their broad parameters are clear.

The critical assessment is whether Greece's debts as a proportion of gross domestic product can be brought below 120 percent by 2020, from around 160 percent now.

The IMF has identified 120 percent as the upper limit for Greece's debt mountain, saying anything above that is unsustainable given the country's poor growth prospects and its need for huge and demanding structural economic changes.

But with GDP having contracted for the past four years and set to decline a further 7 percent this year -- substantially more than the 5 percent originally expected -- the country is climbing an ever-steeper hill towards solvency.

This offers a potential window since Greece's bailout terms, agreed earlier this year, left scope for re-evaluation if its recession proved deeper than expected. However, the German finance ministry said last week that clause was not legally binding.

At the same time, Athens' efforts to reduce the debt by slashing the budget deficit and carrying out a far-reaching privatisation programme have so far yielded scant results.

Deeper budget cuts that will save a further 11.5 billion euros in 2013 and 2014 are promised, but the question is whether they will be fully implemented -- a hurdle that has routinely tripped up Athens in the past, leaving it short of targets.

CLIFF OR CORNER?

The assurances of Samaras, who until he took power was an opponent of austerity measures, that Greece will meet its obligations this time around are undermined by the facts.

Because of delays in implementing previous commitments, caused in large part by the holding of two elections over three months, Athens is substantially off-track in its 174-billion-euro bailout programme, EU and Greek officials acknowledge.

They disagree over the amounts, but some estimates suggest Greece will have to come up with another 20-30 billion euros in cost-cutting and debt-reduction measures if the debt-to-GDP ratio is ever to be put back on a sustainable trajectory.